Velvel on National Affairs

This progressive blog sets forth the personal views of the Dean of the Massachusetts School of Law on national events. Occasionally, the responses to his views or other interesting articles are also posted.

Thursday, April 23, 2009

The Four Torture Memos, Eichmann, And The Obama Administration.

April 23, 2009

Re: The Four Torture Memos, Eichmann, And The Obama Administration.

PART I

I have read the four memoranda that were recently released by the DOJ and authorized torture. Permit me to invent a similar but short memo that will allow the reader, without reading the approximately 120 densely packed pages of the four memos, to grasp their style, their character, their techniques, their aims, and, inherently and unavoidably, the nature of the people who wrote or signed off on them: John Yoo, Jay Bybee and Steven Bradbury.

To: Reinhard Heydrich

From: Joseph Alstotter, Chief of Section of Legality

Re: Transportation

Date: February 1, 1942

You have asked the legal opinion of the Section of Legality on a matter related to transportation.

You have informed us that the trains containing persons being taken to Auschwitz, mostly Jews, have cars in which the transportees are so numerous that they are forced to stand for the entire trip, which takes five days and eleven hours. Because of the close packing of standing bodies within the cars, there is a lack of air: the conditions are suffocating. Although the transportees are allowed out of the car for fifteen minutes once every eight hours, when they are each fed half a bowlful of thin gruel by the side of the tracks, the conditions of transportation cause some of them to weaken so greatly that they suffocate inside the cars. Or by somehow sliding to the floor (even though the close packing of the bodies causes some of their bodies to be held vertical for a period after they have already died), they become trampled to death. Old women, old men, and young children, you inform us, are the ones most susceptible to dying by suffocation or by being trampled after sliding to the floor.

You further inform us that, when the trains stop once every eight hours and people get off to eat, there usually are a number of transportees who are too weak to get back on the train or who feign such weakness. These individuals are quickly examined by a doctor who accompanies the train for this purpose. If the examination shows them to be too weak to continue, they are shot and left by the side of the tracks. Medical officers attest that the shootings cause no unnecessary or long lasting pain because the people are shot by pressing the muzzle of a pistol directly against the back of the head so that death is instantaneous.

You have informed us that the train cars are packed as tightly as they are because of military necessity. Our armies are fighting the Bolsheviki in a life and death struggle on the eastern front. If we lose the war on the Bolsheviki front, Germany will be laid waste and will cease to exist as a nation. There is therefore an overwhelming military necessity to use the railroad, one of Poland’s few, to move a continuous stream of tanks, artillery, small arms, ammunition, food, etc. to our eastern armies. Engines and cars are thus employed exclusively for that purpose, with the sole exception that once each week an engine and ten cars are used to transport Jews to Auschwitz. This movement of the Jews is essential because they, like the Bolsheviki, are a bone in the throat to the German people and must be eliminated for Greater Germany to survive and prosper. (Not surprisingly, they often are the leaders of the Bolsheviki.) Transporting Jews to Auschwitz carries out a major policy decision of the Fuhrer and his advisers established at the Wannsee Conference in 1941 and set forth in appropriate prior memos from this office.

As you have explained to us, this railroad transportation of the Jews, as essential as it is, must be done in a way that minimizes interruption of, or interference with, the movement of supplies to our eastern armies. The cars are therefore packed as tightly as they are, since otherwise three trains per week would be required instead of just one, with a corresponding adverse impact on the movement of supplies to our armies and a correspondingly enhanced risk of losing the war against the Bolsheviki, with the accompanying destruction of Germany.

** * * *

You have asked us, in light of these facts, to opine on whether the transportation of Jews to Auschwitz in this way is a crime against international law in violation of the rule laid down in the 1921 case of Van Devent v. Hohenzollern. Our opinion on this question is required because, now that the United States, under the Rooseveltian Jewish cabal, has entered the war against us, a few officers and soldiers who are involved in the transportation of Jews have asked for assurance that this is legal, lest they be subject to punishment as war criminals should Germany unexpectedly lose the war. You recognize that this kind of defeatism could be handled in the usual way, by shooting the offender or hanging him from a lamppost, but you think it would be better if it were possible to obtain an opinion from the Section of Legality holding that no crime is being committed and there can therefore be no punishment for any supposed violation of international law.

It is our judgment that the transportation to Auschwitz, as you have described it to us, is not a crime, is completely lawful, and cannot be punished. In Van Devent v. Hohenzollern, German soldiers had been fired on by partisans, who were not in uniform, as the Kaiser’s armies moved through Belgium in 1914. (The partisans would fire from roofs, windows, etc.) In consequence, when the Kaiser’s army would enter a Dutch town, it began to shoot three or four of the leading citizens -- the mayor and town councilmen, for example -- as a warning to other partisans of what would happen if German soldiers were killed by nonuniformed partisans. This expedient worked very well, since the shooting of German soldiers by partisans ceased.

Nonetheless, the Dutch court ruled in 1921 that the shooting of town leaders as a warning to potential partisans constituted a crime under international law. The court’s reasoning was that an army going through enemy territory cannot shoot innocent people, or anyone under its control whether innocent or not. The court said that the shooting of innocents, or even of guilty parties without some form of suitable trial to establish guilt, cannot be part of state or military policy under international law, and necessarily is, instead, a crime, under international law.

As we have stated previously, however, the German government does not accept that the tribunals of foreign governments can establish the rules governing what it is legal or not legal for the German government to do. Therefore, the decision in Van Devent v. Hohenzollern cannot govern German soldiers in the performance of their duty. In the present case, moreover, and regardless of what the Dutch court said can or cannot be part of state policy, it is clear that transporting Jews to Auschwitz is the state policy of the German Reich, in accordance with the will of the Fuhrer and the decisions of the Wansee Conference, which he has approved. It is equally clear, as stated in our memorandum of December 15, 1941, that it is Germany’s state and military policy to fight a war of annihilation against the Bolsheviki on the eastern front.

The mode of transportation to Auschwitz melds the two state policies: it transports enemies of the German people (the Jews) to Auschwitz for annihilation, sometimes after a suitable period of working in mines and factories for the Third Reich, while minimizing interference with the transportation of tanks, guns, ammunition, food, etc. to German troops fighting a desperate war against the Bolsheviki on the eastern front.

Because war against the Bolsheviki and annihilation of the Jews are both high state policies, and the transportation of the Jews is done in a way that carries forward that policy while minimizing interference with the policy of war against the Bolsheviki, it is our opinion that the transportation, as carried out, cannot and does not violate any rule of law.

Our opinion is limited to the facts as you have described them to us, and is not intended to cover any different or altered facts.

Please let us know if we can be of further assistance.

Joseph Alstotter Chief of Section of Legality

From the foregoing short invention, whose style, character, techniques and aims mimic many a legal memo and in particular mimic the four torture memos, one can readily grasp a lot. The short invented memo exemplifies the kind of language used in the four Department of Justice memos: formal, legalistic, bloodless, designed to camouflage the most horrible conduct in abstract formulations. It mimics the acceptance, use, and non-questioning of facts and arguments that have been provided by the persons who seek the legal opinions for their own protection. It mimics the torture memos’ use of legal materials to approve monstrous actions, which is done at phenomenal length in the four torture memos (as if extreme long windedness can substitute for rightness). It mimics the transparent goal of trying to clothe the most awful actions in high sounding reasons of state in order to justify such actions under the law. It mimics the four memos’ (obviously guilt-caused) effort to escape responsibility as much as possible by saying it is confined to the facts given to the writer. It mimics the self referential technique of referring to prior memos from the same office which say the same things. It mimics the four memos’ claim that the most horrible acts are performed in a way that supposedly causes no pain -- which the authors of the torture memos have no real way of knowing since they were not themselves subjected to the techniques nor even present to see their effects. It mimics the claim that acts are overseen by medical personnel. It shows how, as in the four memos, the techniques of writing and law can be used to justify the most horrific conduct while pretending to be an exercise in legitimate lawyering. It shows why the New York Times said, on Sunday, April 19th (as has been said here in part in previous postings): These memos are not an honest attempt to set the legal limits on interrogations, which was the authors’ statutory obligation. They were written to provide legal immunity for acts that are clearly illegal, immoral and a violation of this country’s most basic values.It sounds like the plot of a mob film, except the lawyers asking how much their clients can get away with are from the C.I.A. and the lawyers coaching them on how to commit the abuses are from the Justice Department. And it all played out with the blessing of the defense secretary, the attorney general, the intelligence director and, most likely, President Bush and Vice President Dick Cheney.

And it mimics the transparent fact, or at least it would if it had been written “for real” instead of only to enable readers to understand the nature of the torture memos, that the authors of the torture memos are monsters disguised as human beings.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about¬_LTV.htm.

Tuesday, April 21, 2009

Re: Feeder Funds And The SIPC.

April 21, 2009

Re:Feeder Funds And The SIPC.

I’m probably missing something, in fact I’m probably missing a lot, but as far as I know there has been little in the way of official release of certain crucial numbers related to the Madoff scam.The government has said that $65 billion was lost; I presume that $65 billion is the collective total shown on the November 30, 2008 statements, and it therefore is the number I shall use here for the total loss.It has been estimated at various times, if memory serves, that there were either 8,000 accounts or 13,000 accounts. But these would seem to be the number of accounts listed with Madoff, and, since a feeder fund was but one account, these numbers do not include any of the persons who invested through the feeder funds.It has also been estimated -- with what accuracy I have no idea -- that if you were to count all the people who invested through feeder funds, pension funds, etc., there are 50,000 people who lost money with Madoff.

The numbers -- which we generally cannot know for sure at present because of silence by those who may know them -- are especially important with regard to restitution from SIPC (as well as certain other modes of restitution). For the numbers can tell us what the chances of recovery from SIPC actually are.

In this connection, though I personally am a direct investor, I am one of those who have never understood the morality or the decency of denying SIPC recovery to those who invested through feeder funds.In this regard, I once pointed out on a MadoffSurvivors Steering Committee phone call (or Advisory Committee phone call or a whatever-it-is-now-called phone call) that the SIPA’s use of the word “customer,” the word which is the basis of excluding feeder fund investors from obtaining SIPC recoveries, does not itself exclude investors through feeder funds from being customers. There is nothing ex cathedra or from on high about it.Rather, the definition of customer that causes feeder fund investors to be excluded from individual recoveries is judge made law, law made decades ago by courts in accordance with arguments put forth by SIPA.This point was met on the phone call with a degree of hostility and scorn on the part of one individual that was startling if not shocking.(As I understand it, the individual claimed -- wrongly -- that the definition of customer which excluded feeder fund investors was from the statute rather than from judicial rulings.)It was in part this person’s continuing vitriol (not to mention other, related conduct that the Advisory Committee knows of very well) that caused me to resign from the Advisory (or Steering) Committee about two weeks ago. But the fact nonetheless is that the definition of “customer” which excludes feeder fund investors is not in the SIPA statute, but goes back, as near as I can tell, to the 2d Circuit court of appeals opinion in early 1976 in SIPC v. Morgan, Kennedy & Co.This was before there were feeder funds, as far as I know, although at the time there were smaller collective groups of defacto or dejure investors such as the 108 person profit-sharing plan involved in the Morgan, Kennedycase itself.Of course, even though the Morgan, Kennedy interpretation of customer is not suitable to current conditions, its age -- 33 years -- may make it “undislodgeable” so to speak.

Recently, however, to judge by the traffic on MadoffSurvivors, some investors through feeder funds, who claim -- perhaps rightly (probably rightly?) -- to be the large majority of people who lost money, are beginning to rebel against the focus (as I and others see it) mainly on direct investors, with associated lack of focus on feeder fund investors.There are feeder fund investors who seem no longer to accept the argument that the group must focus on what its leaders regard as more doable - - e.g., getting rid of Picard’s unjustifiable definition of net equity, and raising the SIPC recovery to $1.6 million, all for direct investors, instead of trying to get SIPC recovery for indirect investors who invested through feeder funds.

Now, it may be that certain numbers will make it insuperably difficult to have the definition of “customer” changed to include investors through feeder funds.(I shall discuss these numbers below.)But if this is true, it should reinforce in people’s minds, especially people who were feeder fund investors, the vast importance of seeking other forms of restitution, especially restitution through taxes. The IRS’ recently announced “safe harbor” provisions for theft deduction exclude feeder fund investors because they are not so-called “qualified investors.”This is an outrage.As adequate as the IRS’ recent revenue ruling and procedure may be for some people (especially the very wealthy who will obtain deductions worth scores of millions or more), it is vastly inadequate for others, and people should work on getting them changed to include feeder fund investors.People should also get behind the efforts of Steve Breitstone to obtain a change in the tax law that would allow persons to get refunds of taxes paid on phantom income going back to 1995 or 1992 (when the SEC assured people -- wrongly -- that the deal was on the up and up, that there was no fraud, no Ponzi scheme).A combination of making theft deductions available to feeder fund investors who paid taxes, plus tax refunds for all defrauded investors going back to 1995 or 1992, would go far towards providing adequate though not full restitution for many who for years paid the IRS taxes to which it had no right and which resulted from a scam that the IRS itself seems to have furthered in 2004 by approving of Madoff as a non-bank custodian for IRAs in violation of the IRS’ own regulations.

Of course, though people should focus on getting legislative corrections of the IRS’ inadequate recent tax guidance and on obtaining legislation allowing refunds, this won’t help those who did not pay taxes:charities, IRAs, pension plans, etc.To help them, something else is needed:either recovery through SIPC, which would leave many of them vastly short of adequate restitution for the governmental derelictions committed by the SEC and, apparently, the IRS too, or recovery through a plan that I think better than anything currently in focus.The plan in mind would cover all investors of any type, would enable them to obtain roughly the same annual income as before though they would have to wait several years to recover principal, and would cost the government less money for many years than anything else that people currently have in mind.

Speaking candidly, I am going to pursue this plan pretty much by myself for a few weeks, in order to see whether it initially gets a good or bad reception.If it gets screwed up at the beginning, I want to be the one who screws it up, rather than having it screwed up by people with whom I am in disagreement, to put it gently.Regardless of whether it initially meets with a good reception or a poor reception, I will eventually let people know about it, so that they can help if they wish. But at the beginning I shall pursue it alone, while urging readers to get behind Steve Breitstone’s efforts to obtain tax refunds, which would be enormously helpful, at least to those who have paid taxes on Madoff income for a considerable number of years.

Now let me turn to numbers which may drive what can be accomplished with regard to obtaining recovery for feeder fund investors through SIPC. This problem of assessing the numbers is made more difficult because only Picard, SIPC, the IRS, perhaps the U.S. Attorney’s office and/or other governmental or quasi governmental bodies can currently know or even reasonably estimate actual numbers involved.And, if they do know the relevant numbers, they generally are not talking.

But let’s assume that whoever has opined that there are 50,000 victims if one includes feeder funds is right.Let’s further assume that, if feeder fund investors were eligible for SIPC recoveries, only half of the 50,000, or 25,000, could recover $500,000 from SIPC under Picard’s crabbed definition of net equity.Twenty-five thousand times $500,000 is $12,500,000,000 (twelve billion, five hundred million dollars). If SIPC recovery were raised to $1.5 million (people generally use the figure $1.6 million, but I am using $1.5 million to keep the multiplication really simple), the amount of SIPC recovery would be $37.5 billion dollars.

If approximately two-thirds of the 50 thousand people -- for simplicity let’s call it 35,000 of them, which is just over two-thirds -- are eligible for a full SIPC recovery of $500,000, then the amount of recovery would be $17,500,000,000 (seventeen billion, five hundred million dollars).If the recovery was raised to $1.5 million, the total would be $52,500,000,000, (52 billion, 500 million dollars, or just over 80 percent of the total government-claimed loss of $65 billion).

Now assume that only one quarter of the assumed 50,000 people, or 12,500 people, are eligible for a full SIPC recovery.At a recovery of $500,000 per person, the SIPC restitution would be $6,250,000,000 (six billion, two hundred and fifty million dollars), and at a recovery of $1.5 million per account, the restitution would be $18,750,000 (eighteen billion, seven hundred and fifty million dollars).

Now, these figures are all very rough, very approximate.The number of people involved is totally an assumption.The number eligible for full recovery is totally an assumption.That some of these or others would be eligible for only partial recovery is ignored. But even though all the figures are mere assumptions, I think the figures nonetheless give you a sense of the orders of magnitude that are involved if feeder fund investors were eligible for SIPC recoveries (orders of magnitude which, as far as I know, nobody has tried to assess before, at least not publicly).The orders of magnitude lend numerical backing to people’s instinctive thought that Picard and Harbeck are trying to restrict and lowball investors to the maximum extent possible.One wonders what Picard and Harbeck think will be the total SIPC payout -- what they plan for the total SIPC payout to be.If I had to make a sheer guess, albeit one based on Harbeckian statements regarding SIPC’s ability to meet the demands upon it, I would speculate that they intend to hold SIPC’s total outlay -- its payments to investors minus amounts received from clawbacks -- to somewhere in the neighborhood of one and one-half to two billion dollars. If one calls it two billion -- which may be generous -- and one assumes the number of direct investors is a number about half way between various estimates -- let’s say the number is 10,000 direct investors - - this comes out to $200,000 per investor on average.($200,000 times 10,000 investors is two billion dollars.)To confine SIPC payments to an average of $200,000 per investor, Picard and Harbeck have to be very stingy, they have to use the illegal cash in/cash out method so as not to pay anything to people who lived on Madoff earnings, they have to refuse to consider providing restitution for people in feeder funds, they have to claw back (at least from those who are not plainly innocent), and they have to fight raising the top limit of recovery from $500,000 to $1.6 million.

Indeed, you can rest assured in my judgment that Picard and Harbeck will fight to the last ditch in court against any effort to change any of what they are doing, e.g., any effort to force upon them a different definition of net equity than their illegal cash in/cash out basis, and any effort to change the judicially-created definition of customer so that it would include feeder fund investors instead of excluding them.

With regard to the fight Picard and Harbeck will put up in court, I understand that some of the expert SIPC and SEC lawyers who were found by the Steering Committee are expressing concern that Picard is now turning down investors whose lawyers (if any?) will not be versed in the law of SIPC, of bankruptcy, of securities regulation.The fear is that the first appeals will therefore be taken, and the governing precedents will be set, in cases which match highly experienced, very knowledgeable lawyers for SIPC and Picard against lawyers who are basically ignorant of the relevant fields of law. This is a serious matter.It is not to be treated lightly.

Some time ago I suggested that, in order to avoid “turndowns” by Picard based on improper principles (like his definition of net equity), the lawyers found by the Steering Committee should bring what is called a declaratory judgment action seeking a judicial ruling that Picard could not do what he had plainly said he is going to do and what it seems he may now have begun doing.The suggestion was rejected on grounds I found at least reasonable even though I disagreed with them.But now it seems ultra clear that, no matter what, the knowledgeable lawyers had better start preparing what are called “friend of the court,” or “amicus curiae,” briefs that will be filed in any case of a “turndown” that is appealed to any court -- bankruptcy district, appellate or what not.As well, the lawyers should prepare motions to intervene in any such appeal.(I have filed both kinds of documents in my career, including amicus briefs by the dozens in the Supreme Court and papers seeking intervention in a gigantic governmental antitrust case in a federal district court).Whether done as an amicus paper, as a motion to intervene, or as both in the alternative, the paper should discuss the state of the relevant law generally, should discuss the New Times case in particular, and should elaborate the evidence, the actual evidence regarding the lawyers’ own clients and others, that the lawyers wish to present to the court for its consideration because the evidence bears on relevant matters.

To now go back to a main thread, however, it seems obvious that, because of the order of magnitude of the numbers that likely are involved, it will be impossible to get Picard or Harbeck to voluntarily change the definition of “customer” they follow so that it would include feeder fund investors instead of excluding them, or to voluntarily change the definition of net equity that they are using.On appeal, at least if the appeal is manned (or womanned) by good lawyers on the investors’ side, there is an excellent chance that Picard and Harbeck will lose on their definition of net equity. As lengthily discussed here before, their definition, in my judgment, flies in the face of the recent 2004 court of appeals decision in New Times; and Picard and Harbeck therefore could easily lose even though such a loss will cost SIPC a fair amount of money.

But it will be harder to defeat Picard and SIPC in court on the definition of customer, which presently excludes feeder fund investors, because this definition, even though it was established before there were feeder funds and is wholly inadequate for today’s world, nonetheless was established thirty-three years ago.Plus, Harbeck and Picard will play on courts’ always-present fear of costing governmental or quasi governmental bodies a lot of money.A new definition of customer that includes feeder fund investors would upset a case-law definition followed for 33 years (as opposed to following the New Times decision that is only five years old), could cost SIPC tens or even scores of billions of dollars, and therefore is not a definition a court may wish to embrace.Morality and decency probably won’t enter into it in court when it comes to departing from a long settled rule, even one that is out of sync with modernity.The courts are likely to say investors should go to Congress for relief on this particular point.

So . . . . to conclude:Much as I personally favor including feeder fund investors in SIPC recoveries, this is going to be a hard row because of the amounts of money this would cost SIPC.I suspect feeder fund investors may be better off putting extensive efforts into backing Steve Breitstone’s efforts regarding income tax refunds, seeking a legislative or regulatory change that makes them eligible for theft deductions under the (concededly inadequate) safe harbor procedure, seeking other changes from Congress (including increases in the amount recoverable from and the persons who can recover from SIPC), and backing a plan that I will be working on alone for awhile but will present publicly after initial contacts regarding it, whether those contacts prove promising or unpromising.*

R:\My Files\Blogspot\Blogltr.FeederFundsAndSIPC.doc

* Thisposting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com.All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law.If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast.To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page.The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio.For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to:www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

Friday, April 17, 2009

Was The IRS As Culpable As The SEC In The Madoff Scam?

April 17, 2009

Re: Was The IRS As Culpable As The SEC In The Madoff Scam?

This posting raises the question whether the IRS may be as culpable as the SEC and FINRA for the continued success of Madoff’s Ponzi scheme. If the possibility raised here turns out to be true, as I suspect will be the case, this would be a disaster for the country. For it would mean that what is perhaps the one agency which above all others must be kept competent and clean as a whistle, the agency that collects taxes, was instead a witting or unwitting facilitator of the worst kind of fraud. The consequences of this might accurately be called incalculable.

It is unknown to most people that, as part of its extensive authority over pension plans of all types, the IRS has the authority to approve so called non-bank custodians for IRAs and various other kinds of accounts (e.g., medical health plans). This goes back to the Employment Retirement Income Security Act of 1974. Congress, greatly concerned over many aspects of pension plans -- it wanted them, for example, to vest and be portable -- passed the 1974 act because

One of the most important matters of public policy facing the nation today is how to assure that individuals who have spent their careers in useful and socially productive work will have adequate incomes to meet their needs when they retire. This legislation is concerned with improving the fairness and effectiveness of qualified retirement plans in their vital role of providing retirement income. In broad outline, the objective is to increase the number of individuals participating in employer-financed plans; to make sure to the greatest extent possible that those who do participate in such plans actually receive benefits and do not lose their benefits as a result of unduly restrictive forfeiture provisions or failure of the pension plan to accumulate and retain sufficient funds to meet its obligations; and to make the tax laws relating to qualified retirement plans fairer by providing greater equality of treatment under such plans for the different taxpayer groups concerned.

Congress had found that problems with pension plans had included, among others, “Inadequate coverage,” “Discrimination against the self-employed and employees not covered by retirement plans,” “Inadequate vesting,” “Inadequate funding,” “Misuse of pension funds and disclosure of pension operations.” Congress determined that “It is time for new legislation to conform the pension provisions [of prior legislation] to the present situation and to provide remedial action for the various problems that have arisen . . . .” (Emphasis added.) Congress provided “additional rules regarding fiduciary requirements,” and relied heavily on the IRS to enforce fiduciary standards:

Your committee believes that primary reliance on the tax laws represents the best means for enforcing the new improved standards imposed by the bill. Historically, the substantive requirements regarding nondiscrimination, which are designed to insure that pension plans will benefit the rank and file of employees, have been enforced through the tax laws and administered by the Internal Revenue Service. As a result, the Internal Revenue Service is already required to examine the coverage of the retirement plans and their contributions and benefits as well as funding and vesting practices in order to determine that the plans operate so as to conform to these nondiscrimination requirements. Also, the Internal Revenue Service has administered the fiduciary standards embodied in the prohibited transactions provisions since 1954.

Your committee believes that the Internal Revenue Service has generally done an efficient job in administering the pension provisions of the Internal Revenue Code. The very extensive experience that the Service has acquired in its many years of dealing with these related pension matters will undoubtedly be of great assistance to it in administering the new requirements imposed by the committee bill.

However, because the bill increases the administrative job of the Service in this respect, your committee believes that it is desirable to add to its administrative capability for handling pension matters. For this reason, the committee bill provides for the establishment by the Internal Revenue Service of a separate office headed by an Assistant Commissioner of Internal Revenue to deal primarily with pension plans and other organizations exempt under section 501(a) of the Internal Revenue Code, including religious, charitable, and educational organizations. In order to fund this new office, the bill authorizes appropriations at the rate of $70 million per year for such administrative activities. [That is $70 million per year in 1974 dollars, which is somewhere in the neighborhood of $250 million to $350 million today.] (Emphases added.)

Congress decreed that, although the trustee or custodian of an IRA account is usually a bank, a nonbank could also be a trustee or custodian if the nonbank provided “evidence,” or “substantial evidence,” that it met the necessary standards.

Under the governing instrument, the trustee of an individual retirement account generally is to be a bank (described in sec. 401(d)(1), [FN71]. In addition, a person who is not a bank may be a trustee if he demonstrates to the satisfaction of the Secretary of the Treasury that the way in which he will administer the trust will be consistent with the requirements of the rules governing individual retirement accounts. It is contemplated that under this provision the secretary of the Treasury generally will require evidence from applicants of their ability to act within accepted rules of fiduciary conduct with respect to the handling of other people’s money; evidence of experience and competence with respect to accounting for the interests of a large number of participants, including calculating and allocating income earned and paying out distributions to participants and beneficiaries; and evidence of other activities normally associated with the handling of retirement funds.

* * * * *

Although the bill generally requires that a trustee administer an individual retirement account trust, the bill also provides that a custodial account may be treated as a trust, and that a custodian may hold the account assets and administer the trust. Under the bill, a custodial account may be treated as a trust if the custodian is a bank (described in sec. 401(de)(1)) or other person, if he demonstrates to the satisfaction of the Secretary of the Treasury that the manner in which he will hold the assets will be consistent with the requirements governing individual retirement accounts. Again, it is contemplated that the Secretary will require substantial evidence (as described above) to determine if a person other than a bank may act as custodian. (Emphases added.)

Congress further required the trustee of an IRA to file annual reports:

The bill provides that the trustee of an individual retirement account (or issuer of a retirement annuity) is to report annually to the Secretary of the Treasury regarding contributions to the account or annuity and regarding other matters as prescribed by regulations. Your committee intends that the regulations will include a requirement that the trustee or issuer file annual information returns with the Internal Revenue Service (with copies to each individual for whose benefit a retirement account or a retirement annuity is maintained) on the amount of contributions to and distributions from the account or annuity.

So, it is clear beyond peradventure that Congress enacted the 1974 law in order to be certain that pensions, IRAs and similar kinds of arrangements are safeguarded -- that “individuals who have spent their lives in useful and socially productive work will have adequate incomes to meet their needs when they retire.” Subsequently, the IRS established regulations -- carrying out Congress’ purposes -- that had to be met for an institution to be approved as a nonbank custodian (NBC). Among the regulations are ones which ensure continuity of the NBC by providing “Sufficient diversity in the ownership of an incorporated applicant,” diversity requiring that any person who owns more than 20 percent of the voting stock in [an NBC] cannot own more than 50 percent of it. An NBC applicant also has to “demonstrate in detail its experience and competence with respect to accounting for the interests of a large number of individuals,” and must have a “separate trust division” in which “the investments of each account will not be commingled with any other property.” Also, “Assets of accounts requiring safekeeping will be deposited in an adequate vault” with “A permanent record . . . of assets deposited in or withdrawn from the vault.” As well, the NBC “must keep its fiduciary records separate and distinct from other records.”

In addition, by an IRS General Counsel Memorandum that was “Date Numbered: April 13, 1984” (but that also bears the date October 11, 1983), the IRS insisted that, in carrying out the duties Congress gave it, “The legal authority for the inspections of books and records of . . . [an] approved nonbank trustee for individual retirement accounts . . . is inherent in the language of the [statutory section] which allows substantive discretion to the Commissioner in the setting of standards for nonbank trustees as well as the method of enforcement of those standards.” Because the IRS had reason to believe that various nonbank trustees “may not be in compliance with the applicable requirements for nonbank trustees,” the Internal Revenue Service “propose[d] to institute a program to verify compliance of specific nonbank trustees with the applicable requirements of the regulations.”

Thus, to carry out Congress’ desire for the safeguarding of pension plans and IRAs, the IRS established rules limiting percentages of ownership in NBCs, requiring NBCs to show expertise in relevant accounting, requiring a separate trust division, requiring a separate vault and separate records, and demanding access to an NBC’s books and records.

All of this raises an overarching question with regard to Madoff, to wit, how in the hell did Madoff become an approved nonbank custodian for IRA accounts in 2004?

It has been widely believed, of course, that Madoff’s firm refused to handle IRA accounts itself -- that, if one desired an IRA account, one had to work through FISERV or its predecessors (like Retirement Accounts Incorporated). Lately, however, we are beginning to hear of people who say they had an IRA account directly with Madoff, not through FISERV. And, in any event, since FISERV and its predecessors never had in their custody any securities purchased by Madoff for customers (they couldn’t have had them, since Madoff never bought securities), Madoff was what I have heard referred to as a subcustodian for FISERV (at least he would have been a subcustodian had he actually bought securities for the accounts). So, one way or another Madoff was a nonbank custodian -- or at least would have been had he bought securities instead of faking it.

Alright, so here is a guy who comes to the IRS and says he wants to become an approved nonbank custodian of securities, and who gets approved by the IRS in 2004. How did that happen? Did the IRS simply ignore its own regulations? For instance, did it ignore its own requirement that he not own more than fifty percent of the company? Did it not check to see whether he had a separate trust division. Did it not check to see whether securities were kept in an adequate vault and not commingled, and whether there was a permanent record of assets put into and taken out of the vault? Did it not check to see whether fiduciary records were kept separate from other records? Did the IRS not examine Madoff’s books and records, as it had been claiming a right to do for two decades, since 1984?

Had the IRS done these things to determine compliance with its own regulations regarding becoming an approved nonbank custodian for IRAs, had it done these things which it seems that it must not have done, it almost surely would have discovered Madoff was a fraud. Madoff’s game almost surely would have been up. The IRS would have found, for example, no vault with securities. It would not have found any securities. It would have found no separate trust division. It would have found no books and records of the kind needed to be a nonbank custodian of IRAs. It would have found that Bernie Madoff owned almost the whole damn business, not a “mere” 50 percent.

But since the IRS approved Madoff as a nonbank custodian in 2004, it must not have done these things. Its approval of Madoff, moreover, raises additional questions. Why did Madoff seek IRS approval in 2004? What did he gain from it, especially since he was telling people that he would not accept IRA accounts (except through FISERV). (Was he afraid of lawsuits for being a nonapproved nonbank subcustodian?) And knowing in advance, as he must have, what the IRS regulations required, how did Madoff even dare to apply for approval as a nonbank custodian? Was the fix in somehow?

Or did the impetus for seeking approval from the IRS not come from Madoff, but from the IRS itself? Did the IRS, for example, learn that Madoff was acting as an unapproved nonbank custodian of IRAs, tell him this is not permissible, and tell him to apply for approval? And if this is what occurred, how did the IRS not know for 20 years that Madoff was acting as an unapproved nonbank custodian and how did the IRS approve Madoff despite his failure to follow its regulations? Also, if the IRS learned he was acting as an unapproved nonbank custodian and told him to apply for approval, then the IRS had to have known or at least have suspected that he had been acting as an unapproved nonbank custodian for years, yet all it did, apparently, was to require him to submit a few pieces of paper whose veracity it did not check, and it then approved him without even looking at his books and records apparently? (Just as the SEC, after finding out in 2006-2007 that he had been acting as an unregistered investment adviser for years, did nothing except require him to register.)

One bottom line on all this is that there seems to be a plausible case – maybe even an overwhelming case -- that the SEC is not the only government agency deeply at fault here. The IRS may also be deeply at fault. If so, the losses sustained by the thousands of small people, often in their 60s, 70s and 80s, who have been wiped out, who are having to sell their homes, who are trying to find even the most menial work in order to live, are due not just to the fault of one government agency (as well as to Madoff himself), but to the fault of two government agencies (as well as Madoff). This would make only the more compelling than it already is the case for extensive governmental restitution to compensate for the extensive governmental fault that wreaked disaster here.

Indeed, not only would the case for governmental restitution be even stronger than it already is, but the IRS’ restitutionary action to date will look even less generous than some of us already recognize to be the unhappy fact. When the IRS came out with its new revenue ruling and its safe harbor procedure, there was widespread approbation, a widespread feeling that it had been generous. This was in significant part due to sheer relief that the IRS would do something, and in part due to the traditional American unwillingness and inability to look facts in the face and to recognize what is right in front of one’s nose. For those of us of a certain age, this American unwillingness and inability have repeatedly been thrust in front of us since at least 1965 and the start of truly heavy American participation in the Viet Nam war. It was manifest in Viet Nam, in Nixon’s and Kissinger’s enlargements of that war, in Iraq, in the promotion of stock market and real estate bubbles (and in adjustable rate mortgages and their packaging, which fueled a bubble) that common sense and economics warned couldn’t last, in the still continuing unwillingness to look torture and its perpetrators in the face, in the belief, starting with Reagan, that greed can serve as a philosophy of life, in the failure to recognize, as people like Andrew Bacevich and Robert Kaiser have now started to write in marvelous books, that our public life is thoroughly and almost uniformly corrupt at the federal level (and often below that too). Paul Krugman has often made clear the American unwillingness to recognize reality, the drastic failure of intelligence in a democracy whose health requires intelligence.

So it was with the general reaction to the IRS’ action regarding Madoff. Largely lost in the handclapping for the IRS was recognition that its safe harbor procedure was the result of intense, immediate, behind the scenes lobbying by the superrich who were heavy donors to the Democratic party and who would benefit to the tune of deductions worth many score and even hundreds of millions of dollars, while small people (especially those who are older) who had had to take money out of Madoff every year to pay basic living expenses as well as to pay the tax on their very Madoff income itself would receive very little benefit and would instead continue to be subject to their “new- found inability” to afford food and shelter.

Largely lost was that the IRS’ tax relief, designed to greatly benefit the superrich while the small man and woman got screwed, did not provide any restitution for people who invested through IRAs, through pension funds, through feeder funds -- these emphatically were not the private investment vehicles of the superrich Democratic donors who strongly pressed behind the scenes for the IRS’ action.

Largely lost in the unconsidered gratitude and approbation was that, to take advantage of the IRS’ safe harbor theft deduction provision, one had to agree to give up all claims to refunds of taxes paid on phantom income -- on taxes that the government never had any right to -- neither under the constitution nor the statutes -- because there was no income, but which the government now was going to keep anyway.

Largely lost was that, if one were to use the safe harbor provisions -- as many would out of sheer desperation to get something back quickly in order to be able to pay everyday living expenses, at least for awhile -- one was required to give up the right to use legal doctrines that, if pressed in court, could conceivably result in refunds of taxes unconscionably being kept by the government: to give up the right to assert the claim of right doctrine, the equitable tolling doctrine, the equitable estoppel doctrine, the negative tax benefit doctrine.

All of this was lost in the cheers, cheers resulting from the typically American refusal to look facts in the face and possibly resulting here as well from an analog to what I believe is called the Stockholm syndrome.

And on top of all that, now it begins to look as if the IRS, which has done so little to help the small man and woman while kowtowing to the superrich who are heavy donors to the Democratic Party, may itself be one of the causes of the disaster, just like the SEC and Madoff himself. For it looks like the IRS, by ignoring Congress’ desire that it safeguard those who had IRAs, and by ignoring its own regulations on the subject as well, approved of Madoff as a nonbank custodian of IRAs when, had it carried out Congress’ desire and its own regulations, it would have discovered and thereby caused a stop to be put to the fraud which was occurring. And beyond this, for at least 20 years the IRS somehow ignored and/or did not learn that Madoff was acting as an unapproved nonbank custodian although, had it not ignored and/or failed to learn of this, and had it followed Congress’ wishes and its own regulations, it would have rung the bell on Madoff in the 1980s or 1990s.

Does it not go without saying that the IRS’ actions and inactions need to be extensively investigated by Congress, by the media, by Madoff investors, by litigants, by the FBI?

And there is one other point, too, one that might be called earth shaking in its implication. If the IRS acted with the extreme negligence and incompetence, if not complicity, that seems all too possible here with regard to Madoff, did it do the same with regard to other Ponzi schemes or frauds in which companies might have sought to elide suspicion by becoming an approved nonbank custodian? Almost daily, it seems, we hear of more frauds and more Ponzi schemes. Did the perpetrators of those frauds likewise seek and obtain IRS approval to shield themselves from suspicion? The thought is almost too terrible to contemplate. But it cannot be ignored. Just how many Ponzi schemes and frauds, if any in addition to Madoff, may have hidden behind some form of negligent or complicitous IRS approval?*

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

Thursday, April 02, 2009

Madoff And The Mafia: A Mere Speculation Or Almost A Sure Thing?

April 2, 2009

Re: Madoff And The Mafia: A Mere Speculation Or Almost A Sure Thing?

I recently received a communication from a sophisticated, savvy individual who has much experience with how the world works. This person seems to be of the view that the Madoff scam may have been an organized crime operation, with Mafia corruption in Madoff and the SEC. This possibility of organized crime being involved has occurred to me also, and has been alluded to here on a couple of occasions. (Interestingly, Harry Markopolos feared for his life, thinking Bernie would have a hit put on him if his efforts during the 2000s were uncovered. This very fear seems to smack of an organized crime connection, of an unarticulated fear of some type of Mafia connection somewhere in the deal.)

Unless and until the government uncovers and discloses that there was a tie to organized crime, the idea that the Italian, Jewish, Irish, or, more lately, Russian Mafia were involved must remain mere speculation, speculation that might be right or might be wrong. But here are some of the facts and ideas fueling the speculation:

Right now an awful lot of billions of dollars seem to have disappeared into thin air. Did all of this huge sum -- apparently nearly $200 billion over the years -- disappear because of redemptions and Bernie’s personal siphoning off of what -- a few billion perhaps? Could all of it have disappeared because of redemptions when you figure that so many of Bernie’s investors were in Madoff for the duration, that instead of withdrawing their principal, they let it ride, and many of them let the income ride, for literally decades? Madoff was a long term, not a short term, investment for thousands of people, for feeder funds, and for charities. Indeed, there are those who believe the reason he cultivated charities is that they generally withdraw only five or six percent a year, so that he could be sure that, at least in the case of charities, there would be no “run on the bank.” I suppose the same calculation is one reason (along with a desire to attract money in the first place) that lay behind his paying feeder fund managers so much money -- a four percent commission, while they were also charging their investors a one percent commission plus 20 percent of profits. This would ensure there was no possibility that they would withdraw money. (Nobody foresaw the kind of financial meltdown that in 2008 caused feeder funds to need to redeem because their desperate investors were conducting a “bank run” on them.)

So, if one figures that so many investors were in Madoff for the duration -- I would personally bet 90 percent or more, but the Trustee has the ability to know for certain yet has not said -- where did the money go? To me, a very logical possibility is that at least scores of billions, if not as much as $150 billion or more, were siphoned off by the Mafia.

Further fueling the speculation is the fact that, at least as of now, the billions taken in by Madoff appear so difficult to trace. Difficulty of tracing would seem to be a hallmark of organized crime, wouldn’t it?

Then too there was, if I remember correctly, a period when there was great concern that organized crime was attempting to and had to some extent succeeded in penetrating Wall Street. Couldn’t Madoff have been a part of that effort?

There is also the question of Madoff’s employees on the infamous 17th floor. According to the very little that has appeared in the media about them so far, they appear to generally or exclusively have been uneducated persons without training or experience in finance. Nor did any of them ever talk despite what to many of us seems the impossibility, given the tasks they apparently were performing, of never knowing and never even suspecting that something might be wrong. Where did Uncle Bernie get these people? They couldn’t have been recommended to him, even possibly recruited for him, by the Mafia, could they? It’s not possible -- is it? -- that they knew, because of who recruited them, that he or she who talks ends up in the river? Plus, weren’t they paid much better than their lack of education might ordinarily have warranted?

Has the government looked into the 17th floor employees’ backgrounds and connections, into how they came to be hired by dear old avuncular Uncle Bernie?

Nor did anybody in Bernie’s family ever talk though, for reasons often canvassed here and elsewhere, they could not help knowing that something was amiss. Were they aware that to talk is to end up in the river?

Indeed, doesn’t Bernie’s apparent silence and uncooperativeness since being arrested smack of the same thing -- of knowledge that to talk would be a death sentence regardless of what prison he is put into? One might ordinarily think that Bernie might cooperate in tracing the money if, in return, his time in the slammer would be knocked down to, say, five or six years in return for leading the Feds to recovery of monies that might make victims whole or close to it. After all, in five or six years he will be only 75 or 76 and, these days, might be able to look forward to another ten or fifteen years on the outside. Yet he won’t talk, the publicly accepted explanation/speculation being that he is trying to protect his family and its secreted money. But is this explanation right? Is it right even though he and his family must know by now that the family and its money will be closely watched, will be tracked, for decades (just like O.J. Simpson)? Might the explanation therefore be something else entirely -- might it be that he knows that, if he talks, he’ll never live to get out of the slammer in five or six years and, were he somehow to get out of the slammer alive -- which would be unlikely to impossible -- his life wouldn’t be worth a plugged nickel after that because he will soon end up in the river?

Then too, one wonders whether Madoff, in his allocution before the judge may have deliberately given a (perhaps subtle) hint for whatever reasons may have motivated him (perhaps a clever desire to lead the government to try and to succeed in uncovering a mob connection entirely on its own, so that he could get out from under a death sentence). Madoff said in his allocution that he turned to fraud because:

I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations, at any cost.

In papers it filed with Judge Chin just before the hearing on Madoff’s guilty plea and on bail, the government said that Madoff had promised some people returns as high as 46 percent. Dig that -- 46 percent. Now who the hell would you promise 46 percent to except gangsters? That kind of earnings rate just isn’t promised to people unless something is very wrong -- as when organized crime might be financing you at usurious exorbitant rates. And why else, except to keep organized crime satisfied lest his legs be broken at best or, worse, he be found in a concrete barrel at the bottom of the East River, would Madoff, if he was telling the truth about this in his allocution, have “felt compelled to satisfy my clients’ expectations, at any cost”? (Emphasis added.) Compelled to satisfy their expectations -- at any cost? It sounds like a Mafia deal to me.

As well, consider this. When the SEC undertook to investigate Bienes and Avellino in 1992, it feared, as it said, a giant Ponzi scheme. But its fear of a Ponzi scheme was allayed, and it publicly said there was no fraud (a kind of statement it never makes, securities experts say), because Madoff came up with about $450 million to return to investors -- if he did come up with it instead of just saying he had it in order to entice investors to leave their money with him in direct investments instead of using indirect investments through Bienes and Avellino (whom the SEC kicked out of the business -- although the word on the street, everywhere, is that they did not really leave the business but just operated underground). If Madoff really came with $450 million -- did the SEC check the truth of that? -- where did he manage to get such a huge sum so quickly to ward off an SEC finding of a Ponzi scheme? Organized crime would be a logical possibility, would it not? How else could he suddenly come up with $450 million?

* * * * *

That organized crime may have been involved in the Madoff deal is, at present, only a speculation. But the more one considers the already known evidence and the facts that lead to this speculation, the more likely it appears that the speculation could in fact be the truth. One wonders: are the FBI and the U.S. Attorney considering and investigating the possibility that Madoff was an organized crime deal? If they are not, why not? If they are, what are they finding and what and when will Madoff’s victims and the public be told? In ways that one can only begin to guess at now, the answers to these questions will bear on a host of crucial matters, ranging from various forms of possible restitution to victims to the standing of American markets in the world.

There are people who are in touch with relevant governmental actors. They, and the rest of us among victims, in the public, in the media, and in Congress, should begin to continuously demand to know the answer to the question of whether Madoff was or was not tied in with the Mafia. There seems to have been an awful lot of smoke here. Was there also a fire?

* * * * *

I cannot resist closing with the following: When I was a kid around 1952, 1953, 1954, there were some books that came out about gangs and such and that were popular with and read by youngsters. One was The Amboy Dukes, another was The Hoods, and I think A Stone For Danny Fisher may have involved similar things. (None of these books are to be confused with Meyer Levin’s The Old Bunch.) An episode in The Hoods was very funny, at least to a twelve or thirteen year old or a fourteen year old. A group of gangsters had invented a magical machine. You put toilet paper in one end, turned a crank, and money came out the other end. The machine was called the “crap paper machine.” It turned toilet paper into money. It was, of course, a fraud.

The gangsters wanted to sell the machine for lots of money, so they persuaded a businessman to watch a demonstration of it. They put crap paper in one end, turned the crank, and out came money on the other end. The businessman bought it for a fortune (either never thinking to ask why the hoods would sell a machine that printed money instead of just using it to print money, or being satisfied with whatever explanation the hoods gave).

Anyway, the episode was very funny to a kid. Imagine, a bunch of hoods had sold a machine that ostensibly took crap paper and turned it into money. Ho, ho, ho. But hasn’t Madoff created a reverse crap paper machine? Instead of taking in crap paper and turning it into money, his machine took in money and turned it into crap paper. Enough crap paper to service all of New York State for a couple of years maybe.

The question here in regard to Madoff’s reverse crap paper machine is whether, as in The Hoods, the hoods were involved in Madoff’s machine. Were the hoods floating Madoff’s reverse crap paper machine here just as the hoods created the crap paper machine in The Hoods? And is the government focusing on this possibility, which looks like it could conceivably be all too real instead of just speculation.*

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

VelvelOnNationalAffairs is now available as a podcast. To subscribe please visit VelvelOnNationalAffairs.com, and click on the link on the top left corner of the page. The podcasts can also be found on iTunes or at www.lrvelvel.libsyn.com

In addition, one hour long television book shows, shown on Comcast, on which Dean Velvel, interviews an author, one hour long television panel shows, also shown on Comcast, on which other MSL personnel interview experts about important subjects, conferences on historical and other important subjects held at MSL, and an MSL journal of important issues called The Long Term View, can all be accessed on the internet, including by video and audio. For TV shows go to: www.mslaw.edu/about_tv.htm; for conferences go to: www.mslawevents.com; for The Long Term View go to: www.mslaw.edu/about­_LTV.htm.

Appended below are two documents that were not initially posted on my site (Velvelonnationallaffairs.com) or on OpEd News. One is a letter to Judge Chin urging him not to accept Madoff’s guilty plea, and giving the reasons for non acceptance. Judge Chin did accept the plea, however, which I believe was a mistake for reasons given in the letter. The letter has now been released by the court to various national news organizations, and so I am now posting it for ready availability to persons interested in the propriety of acceptance of the guilty plea.

The other document is a response to a Madoff victim who (mistakenly) claimed the simple, clean, curative bond proposal contained in a posting of March 30th would have a present value of $88 billion, and that -- whether he was sarcastic or serious, I do not know -- the proposal would require the government to write a check for the $88 billion. The response to that erroneous claim was not posted previously because I did not think it of sufficient general interest. However, it appears that the bond proposal has been noted by a leading intellectual, so I have decided that the response to the mistaken claim should also be posted now.*

I am a member of and am writing you on behalf of the Steering Committee of MadoffSurvivors. MadoffSurvivors is a Google group with approximately 300 members. They were investors with Bernard Madoff, and their accounts were wiped out by the revelation on December 11, 2008 that Madoff was running a Ponzi scheme. Our estimate, and it is only an estimate, is that the amount of money lost by MadoffSurvivors collectively is probably in the neighborhood of 500 to 700 million dollars.

The members of MadoffSurvivors are not the billionaires, “centamillionaires,” hedge funds, and banks that the celebrity-driven mass media focus on, thereby causing the public to believe that the victims of Bernard Madoff are all wealthy plutocrats. MadoffSurvivors are, instead, “little” people. They are people who usually started with little or nothing, as members of the working class or lower middle class, as immigrants, as children of holocaust survivors. They are people who worked like dogs all their lives, finally saved up enough money to make an investment in Madoff, and now find themselves wiped out. Many -- perhaps even most -- are elderly, in their late 60s, 70s, or 80s. Many had no other savings or income except what they had in or received from Madoff. Many are completely devastated, financially and psychologically. They are selling their homes in order to obtain money to live. They are attempting to reenter the work force, sometimes in menial jobs, in their 60s, 70s and 80s, in order to obtain money for food and shelter. (There is, as you may know, one man in his 90s who is reported to have taken a job in a supermarket passing out fliers, we believe, in order to sustain himself.) They are the victims of both a terrible crime and a terrible tragedy.

The crime and tragedy of which they are victims were not caused by Bernard Madoff alone. They also were caused by a widely circulated public statement by the SEC in December 1992 that there was no fraud involved, and by the subsequent conduct of the SEC from 2000 onward in failing to properly investigate Madoff when given a plethora of tips by Harry Markopolos and, it now appears, by some others as well. The SEC’s failure to pursue the (accurate) charges of a Ponzi scheme made by Markopolos is well known. The SEC’s public statement of December 1992 that no fraud existed, a public statement that was never retracted despite all the tips the SEC later received, is rarely if ever mentioned by the media, but was the cause of huge numbers of people keeping already-invested money in Madoff, putting initial monies in Madoff, and/or putting more money in Madoff. It is an unhappy fact, but a fact nonetheless, that the government itself, by publicly placing the imprimatur of honesty on Madoff in December 1992, and never retracting it thereafter, caused untold numbers of people to invest in and lose billions of dollars in Madoff, and enabled Madoff’s fraud to grow from less than half a billion dollars in 1992 to what Madoff claimed to be 50 billion dollars in 2008. The SEC contributed to disaster by incompetently failing to protect citizens who depended on it for protection -- for the very protection that was a fundamental reason for passage of the federal securities laws in the 1930s.

To the members of MadoffSurvivors, as to other “small people” victimized by Madoff, it is critical that the government uncover, and recover, every possible dollar of Bernie Madoff’s stash, and the stashes of his family members and guilty non family employees, so that as much as possible can be returned to the devastated victims of his fraud and of the government’s negligence or even, possibly, complicity. Very few people believe that all the many billions Madoff took in has been spent by him or his family, or redeemed by prior investors. Rather, it is widely believed, perhaps even universally believed, that there are billions of dollars, perhaps tens of billions of dollars or more, stashed away in banks in countries which in the past have served as secret repositories of ill gotten wealth (Lichtenstein, the Cayman Islands, etc.), in banks in Israel, in illiquid real estate in a number of foreign countries, and in other investments. There is also a deeply unhappy suspicion that branches of various mafias or cartels could have been involved and could have been siphoning off billions of dollars.

For these reasons, the Steering Committee of MadoffSurvivors urges that no sentence be pronounced upon Madoff until, and if legally possible there should even be a suspension of a plea until, the government -- including the Department of Justice, its component the FBI, the SEC, and any other relevant federal bodies -- is willing to formally attest that Madoff, his family members, and his culpable employees have fully told it where every dollar stolen from investors by Madoff has gone, insofar as it is possible to know this, from 1960 or 1962 -- whichever the year Madoff began taking in money from investors -- until the present time; to formally attest to the identity of the persons, institutions, banks, partnerships, trusts, real estate or other property which have or do possess the stolen money or in which it is invested, and will formally attest to and identify every step it used to recover the money; and will formally attest to and identify all evidence of guilt in its possession, as well as remaining locations of the money or the property in which it is invested, in order to aid the efforts of desperately injured investors to obtain more complete restitution through private actions.

With regard to the foregoing, we note that not only should Madoff family members be required to give up their wealth because it is attributable to a fraud, but it was impossible for family members not to have known of the fraud. For at minimum they had to be aware that Madoff was telling many people that the reason he was not charging investors more for his investment “services” was that he was content to have the broker-dealer arm of his company make huge amounts of commissions executing the claimed trades, and they also had to be aware that the broker-dealer arm, which they supervised, was not in fact executing the purported trades and making the commissions. As well, the family members had to have lied to the SEC about vital matters, or else the SEC necessarily would have discovered early on that Madoff was running a huge unregistered investment management business, had thousands of customers rather than none or only a handful, and had different sets of books.

If conditions discussed above are met, so that every penny obtainable by the government to repay victims of Madoff’s fraud will have been identified and collected, then the Steering Committee of MadoffSurvivors would not object to some reduction in the sentence meted out to Bernard Madoff.

Judge Chin, it is a fact, and it often is no secret, that people victimized by Madoff, plus many not victimized by him but aware of the situation -- like investigative reporters and even federal legislators -- have completely lost faith in the federal government in connection with this matter. The incompetence of the SEC, actions by the Trustee that people think niggardly, the failure to date of the IRS to provide guidance or to show lawful generosity towards victims, the now-three-months-long silence on so many relevant matters by so many in government, have exacted their toll. As well, to those who think about the matter, it is obvious that you occupy a position very similar to that initially occupied by Judge Sirica in the Watergate matter. Like him, you could take action that opens the gates for truth -- and, in this case, for recovery by victims -- or you could choose, as he did not, to act in a way that will allow much truth to remain hidden. Obviously, it is the request of MadoffSurvivors that you opt for truth, recovery, and transparency.

Sincerely yours,

Lawrence R. Velvel On Behalf Of The Steering Committee of MadoffSurvisors

cc: Honorable Lev Dassin, Esq.

Response To An Email Regarding The Bond Proposal

The present value to the investors of receiving a collective total of $4.55 billion per year for ten years at a rate of seven percent is approximately $32 billion. Also, the present value to the investors of $65 billion in principal to be received in ten years, calculated at a discount rate of seven percent, is $33 billion. So investors receive a total present value of about $65 billion, not $88 billion.

This total present value of $65 billion “replaces” accounts worth $65 billion plus, assuming an after tax “return” from Madoff of eight percent, another $5.2 billion per year every year for the next ten years, or a present value of $36.5 billion. The total of $65 billion plus $36.5 billion is $101.5 billion. So the total value on November 30th was $101.5 billion.

Thus, the present value of $65 billion to be received from the government “replaces” but is much lower than the 65 billion dollars that was shown in accounts plus the $36.5 billion which represents the value of $5.2 billion per year discounted at seven percent, for a total of value on November 30th of $101.5 billion. Investors are accordingly, much less well off under the bond proposal than they expectably would have been had Madoff been for real. To repeat, had Madoff been for real, their present value would have been $101.5 billion and under the bond proposal it is $65 billion.

Moreover, though the present value to be received from the government is $65 billion, (1) the government’s outlay per year is only $4.55 billion until the tenth year, when it must repay the principal. This is very important. The government emphatically is not writing us a check now or at anytime for $88 billion. It is writing annual checks for only $4.55 billion until the tenth year, when it must also repay principal. (2) Thus the only way for an investor to physically obtain the present value now or at any time before the tenth year would be to sell his or her bonds on the market that will develop for them.

That the government can borrow at 2.8 percent does not affect the present value of what the investors will get at a discount rate of seven percent. Rather it simply means the government can borrow at far less than seven percent (sort of analogously to the fact that banks borrow at, say, three percent (the interest rate they pay depositors) and lend at, say, six percent (the rate they charge their borrowers). Being able to borrow at a rate of 2.8 percent, far less than the seven percent the government is paying us, simply makes it easier for the government to pay us, just as it is easier for a bank to lend at six percent when it pays only three percent on deposits than it would be if the bank paid 5½ percent on deposits.

It must also be kept in mind at all times that the government is largely responsible for our losses, the losses of innocent investors, yet will be paying us only $4.55 billion per year for ten years, while it is giving ten trillion dollars immediately in bailout money to the culprits who caused the current economic disaster. Moreover, almost three billion dollars of that bailout money has already been given to the culprits.

In such circumstances, I find it impossible to understand how, under any fair analysis, the innocent investor can be getting too much under the bond proposal. I stress, of course, that my view necessitates that the analysis need be fair rather than merely political.

Larry Velvel

cc: MadoffSurvivors Madoff Victims

* This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, VelvelOnNationalAffairs.com. All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at Velvel@VelvelOnNationalAffairs.com.

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About Dean Velvel

Name:Lawrence
Velvel

Location:Andover, Massachusetts,
United States

Dean Velvel, an honors graduate of
the University of Michigan Law School, has practiced law in the public and private sectors,
and been a law professor. He is the author of the quartet Thine Alabaster Cities
Gleam. The books in the quartet are entitled: Misfits In America, Trail of
Tears, The Hopes and Fears of Future Years: Loss and Creation, and The Hopes
and Fears of Future Years: Defeat and Victory.

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